The U.S. Supreme Court has recently granted certiorari for a patent case, namely Quanta Computer v. LG Electronics (06-937). The question presented by petitioner Quanta is:
Whether the Federal Circuit erred by holding, in conflict with decisions of this Court and other courts of appeals, that respondent’s patent rights were not exhausted by its license agreement with Intel Corporation, and Intel’s subsequent sale of products under the license to petitioners.
The doctrine of patent exhaustion, also known as the first sale doctrine, typically states that an unrestricted sale of a patented item exhausts the patentee’s right to control the purchaser’s use of the item thereafter. The CAFC had found that the license agreement at issue “expressly disclaim[ed] granting a license allowing computer system manufacturers to combine Intel’s licensed parts with other non-Intel components.” Thus, although Intel was free to sell its microprocessors and chipsets, those sales were conditional. Intel’s customers were expressly prohibited from infringing LGE’s combination patents. Accordingly, the CAFC held that LGE’s rights in asserting its system claims were not exhausted, because the exhaustion doctrine does not apply to expressly conditional sales or licenses.
Links related to the Quanta Computer v. LG Electronics case may be found here: the July 2006 Federal Circuit opinion, the Supreme Court docket, Quanta’s petition, LG’s brief in opposition, and Quanta’s reply (petition, brief, and reply via SCOTUS Blog).
The authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control postsale use of the article.
Per JUSTICE THOMAS, who delivered the opinion of the Supreme Court:
For over 150 years this Court has applied the doctrine of patent exhaustion to limit the patent rights that survive the initial authorized sale of a patented item. In this case, we decide whether patent exhaustion applies to the sale of components of a patented system that must be combinedwith additional components in order to practice the patented methods. The Court of Appeals for the Federal Circuit held that the doctrine does not apply to method patents at all and, in the alternative, that it does not apply here because the sales were not authorized by thelicense agreement. We disagree on both scores. Because the exhaustion doctrine applies to method patents, and because the license authorizes the sale of components that substantially embody the patents in suit, the sale exhausted the patents. (Emphasis ours)
The facts of the case were nicely boiled down to the following paragraph.
Here, LGE licensed Intel to practice any of its patents and to sell products practicing those patents. Intel’s microprocessors and chipsets substantially embodied the LGE Patents because they had no reasonable noninfringing use and included all the inventive aspects of the patented methods. Nothing in the License Agreement limited Intel’s ability to sell itsproducts practicing the LGE Patents. Intel’s authorized sale to Quanta thus took its products outside the scope of the patent monopoly, and as a result, LGE can no longer assert its patent rights against Quanta. Accordingly, the judgment of the Court of Appeals is REVERSED. (Emphasis ours).
Per usual, we will preface our thoughts with the following disclaimer: “It is generally a futile effort to predict how the Supreme Court will rule on any given issue.” That being said, below are some quotes that we found of particular interest:
Transcript at page 4.
JUSTICE STEVENS: Ms. Mahoney, can I just get one thing straight in my mind. Which transaction triggered the exhaustion doctrine in your judgment, the general license to Intel or the sale by Intel to Quanta.
MS. MAHONEY (ON BEHALF OF PETITIONERS): I think they work in combination here, Your Honor, because once the sale was — once the license was entered into with Intel and once unrestricted rights were given to make, use and sell components that would infringe, otherwise infringe these patents, there was really nothing else that could happen –
Transcript at page 8.
CHIEF JUSTICE ROBERTS: So the parties are unwilling to spell out exactly how this is going to work out in their contract, and each side, it prefers to take their chances on how the Federal Circuit’s going to rule. It’s easier to sell these things if they’re not encumbered by these additional license requirements and the manufacturer presumably gets a lot more, but there’s a lot of uncertainty, uncertainty that could have been cured by how the contract was drafted, and people prefer to live with that uncertainty and litigate rather than clear it up in the contract.
Transcript at pages 19-20.
CHIEF JUSTICE ROBERTS: A mere license can prevent the application of the patent-exhaustion doctrine?
MR. HUNGAR (ON BEHALF OF THE UNITED STATES, SUPPORTING THE PETITIONERS): Well, only at the — only at the level of the licensee. That is, if it is true, as Ms. Mahoney said, if the — if LG here had given a restricted license that restricted the right to sell, that said you can only sell in these instances, and if Intel then sold outside those permitted instances, that would be patent infringement.
CHIEF JUSTICE ROBERTS: And it would be patent infringement by the use of the product by the people that Intel sold to?
MR. HUNGAR: Yes, because it was an unauthorized sale.
Transcript at page 21.
JUSTICE BREYER: But you couldn’t put in -you are authorized to sell the bicycle pedals that I have patented only if you impose a restriction that will tell the bicycle user that he must send me a check for $15 in addition to whatever he pays you. That sounds unlawful under contract law.
MR. HUNGAR: Well, it might be lawful. You could certainly do what, in fact, I think some of the seed companies –
JUSTICE BREYER: Or you are going to have -I mean, there’s a doctrine that you cannot impose equitable servitude’s upon chattel.
MR. HUNGAR: Yes.
Transcript at pages 23-24.
MR. HUNGAR: Fine. If they have that restriction and they sell and they do not — they do not obtain the contractual promise of the party that they are obligated to obtain, they’re violating the terms of their right to sell. It’s patent infringement by the seller, and if the buyer uses it it’s patent infringement by them as well.
CHIEF JUSTICE ROBERTS: Exactly. That’s the critical point. You’re telling me that if the buyer, in other words, the kind of third person in this chain, uses the patented article in a way that is contrary to the license that was given to the second person in the chain, then he is liable for contributory infringement under the patent laws and not, as I understood you to answer to Justice Breyer, only under contract law.
Transcript at page 44.
JUSTICE SOUTER: They’re saying the reason they have done so is that the following distinction is significant. There’s a distinction between a license that says you can’t sell this unless certain conditions are satisfied and, on the other hand, a license that says you can sell this, but if you sell it to a buyer who is described by conditions A and B, you’ve got to tell the buyer that we’re going to make a claim against A and B. And the ones — in the first example, there is a limit to the right to sell. In the second example, there is no limit on the right to sell, but there’s a warning about what we’re going to do if you do sell under certain conditions. And I think they’re saying that unless you have a contract of the former sort which limits your right to sell, then when you do sell, exhaustion applies and whatever you may do against the ultimate buyer is — is a contract problem or what-not, but it’s not — it’s not a matter of patent.
MR. PHILLIPS (ON BEHALF OF THE RESPONDENT): Right, and the problem –
JUSTICE SOUTER: Number one, do you think I am being correct in characterizing, describing the distinction they make?
MR. PHILLIPS: I think so.
JUSTICE SOUTER: And B, if I am, why isn’t that distinction an answer to your argument?
MR. PHILLIPS: Because, because it ignores the fact that there are separate patents involved in this case. There is no question that — there is an issue. I mean I don’t think there’s a question that -you know, as to how far you can go down the road in trying to condition a particular sale. I thought this Court may have resolved this already. Mallinckrodt leaves that issue open, but that’s not — that’s not the question.
The issue here is if I sell to you, Justice Souter, a particular chip, whether I condition it or not, I think that’s — to me that’s unenforceable. But the question is, can you then take that chip and use it to violate a separate patent? And the reason you know that it’s not exhaustion –
Transcript at page 50.
MR. PHILLIPS: To be sure, Intel has the authority to sell these things, and it has the authority to sell — it depends on what the things are. It has the authority to sell the chips. It has the authority to sell the systems, but what it doesn’t have the authority to do is to allow somebody downstream to take the chips and put them into the separately patented systems, and the — and the people downstream know that they don’t have that entitlement.
Transcript at page 53.
MR. PHILLIPS: . . .It seems to me the fundamental issue here is they have a limited right when they purchase that product. They didn’t get the right to make other products. They didn’t get the right to breach or infringe a completely separate patent. And that is the basis on which the judgment of the Court of Appeals, which is all that is before the Court, should be affirmed.
Mississippi Farmer Cannot Save Seeds Claimed in Monsanto’s Roundup Ready Patents.
On appeal from the District Court for the Northern District of Mississippi, where Monsanto’s motions for summary judgment of patent invalidity and infringement (among other issues) were granted, Scruggs challenged an order granting Monsanto a permanent injunction. Although finding in favor of Monsanto, the CAFC vacated the injunction and remanded for consideration in light of eBay.
The technology at issue in Monsanto’s patents (U.S. Pat. Nos. 5,352,605; 5,164,316; 5,196,525; and 5,322,938) relates to Roundup Ready and Bollgard/Roundup Ready soybeans and cotton which is resistant to glyphosate herbicide (Roundup) and certain insects. Monsanto licenses the technology with certain restrictions, including 1) an exclusivity provision, 2) a no replant policy, 3) a no research policy, and 4) payment of a technology fee. However, Scruggs purchased the seeds from seed companies, never signed a licensing agreement, and retained the new generation of seeds after harvesting.
On appeal, Scruggs asserted a number of arguments including, among others, 1) the doctrine of patent exhaustion, 2) the existence of an implied license to use, and 3) patent misuse. Only these issues are summarized herein, although infringment, validity, and common law counterclaims were also discussed in the opinion.
Doctrine of Patent Exhaustion: Scruggs argued that it purchased the Monsanto seeds in an unrestricted sale and was therefore entitled to use the seeds in an unencumbered fashion. The first sale/patent exhaustion doctrine establishes that the unrestricted first sale by a patentee of his patented article exhausts his rights in the article. The CAFC held, however, that the doctrine is inapplicable to this case because the use of the seeds was conditioned on obtaining a license. Also, the new seeds grown from the original batch had never been sold, further preventing the application of the doctrine. “The fact that a patented technology can replicate itself does not give a purchaser the right to use replicated copies of the technology.
Implied License Affirmative Defense: The CAFC held that Scruggs had no implied license. In order to establish an implied license, the circumstances of the sale must plainly indicate that the grant of license should be inferred. Monsanto requires all licensees to place notice on seed bags providing notice of the patents, the fact that purchase of the seeds conveys no license, and that a license must be obtained before use. Furthermore, the sellers had no right to confer any license. A seller cannot confer broader rights via an implied license than it has been granted by the patent holder.
Antitrust/Patent Misuse: Scruggs specifically asserted that Monsanto’s restrictions on seed use (exclusivity provision, no replant policy, and technology fee payments) are illegal anticompetitive practices constituting patent misuse. The policy of the patent misuse doctrine is to prevent a patentee from using the patent to obtain market benefit beyond that which inures in the statutory patent right. However, conduct falling within the scope of patent protection includes limited use licensing. Additionally, no patent owner shall be deemed guilty of misuse by reason of his having refused to license or use any rights to the patent. The CAFC found all of Monsanto’s restrictions to be a valid exercise of rights under the patent laws.
Permanent Injunction: Although generally finding for Monsanto on all issues, the CAFC did vacate the trial court’s permanent injunction in favor of Monsanto and remanded for consideration in light of the Supreme Court’s recent opinion in eBay Inc. v. MercExchange, L.L.C. The eBay opinion requires courts to consider the standard four part test for permanent injunctions in patent cases and reversed the traditional rule that the court issue permanent injunctions against patent infringment absent exceptional circumstances.